Castles in the Sky

Home ownership in the United States reached its highest level ever in the Fall of 2004 when 69.2% of households were living in an owner-occupied residence.

That number started to dip for the next several years as housing affordability started to become an issue. Home ownership then went on a massive dive beginning in 2008 as the liberal underwriting of mortgages became known and the Great Recession followed.

Homeownership Rate in USA
1965-2018

By the second quarter of 2016 home ownership had fallen to 62.9%. We had not seen a number that low in 50 years.

The last couple years have seen an uptick in home ownership but housing affordability is becoming a bigger and bigger issue in many parts of the country. This is despite the fact that mortgage rates are still near historic lows.

This graph shows average 30-year mortgage rates since 1971.

30-year average Fixed Rate Mortgage in USA

Recent data suggests that average Americans can't afford a home in 70% of the country.

Even with rising wages and falling mortgage rates, Americans can't afford a home in more than 70 percent of the country. Out of 473 U.S. counties analyzed in a report, 335 listed median home prices more than what average wage earners could afford, according to a report from ATTOM Data Solutions. Among them are the counties that include Los Angeles and San Diego in California, as well as Miami-Dade County in Florida and Maricopa County in Arizona.

Nationally it takes about 1/3 of an average person's income to purchase an average home. However, in Brooklyn and Manhattan it takes 115% of income and it takes 103% in San Francisco.

All of this raises a question in my mind as to what happens if mortgage rates rise to the 6%-8% range? This would not be unusual. These rates have been common except for the last 10 years (when they have been lower) and in the 1975-1985 period (when they were higher).

If  houses in many of areas of the country are unaffordable for so many people with 4% mortgage rates, what happens to house prices if rates rise?

Unless incomes rise dramatically it has to result in falling house prices in those areas where affordability is a problem. That is just basic economics.

In what states is housing affordability a problem?

I came across this map recently that shows the salary you need to buy an average price home in each of the 50 states in the USA.

It takes $154,000 in income to buy the average home in Hawaii and $120,000 in California.

On the other hand, West Virginia ($38,320), and my home state of Ohio ($38,400), are the best places in the country to live if you are looking for affordable housing.

As you might expect, most of the states with the worst home affordability are on the coasts.

However, Colorado is near the top and is actually worse than states like New York, Connecticut, Florida, Oregon and Washington for affordability.

Why is that?

My guess is that it is due to the fact that a lot of people are willing to work for lower wages in Colorado for lifestyle reasons. At the same time, the terrain in Colorado limits buildable lots making land costs for housing high.

The same is undoubtedly true in Utah, Idaho and Montana as well.

At the other end of the spectrum, new building lots in Ohio typically can be had by converting a corn field into a subdivision and Ohio's economic foundation centered on manufacturing has traditionally meant relatively strong middle class incomes.

In the end, the laws of supply and demand answer most economic questions.

Demand in many states has outpaced the supply of houses. This has pushed prices higher and made more and more houses unaffordable to the masses.

However, no castle can be built endlessly in the sky. At some point, it comes back to earth. Economics also teaches us that it is those castles that are the highest in the sky that have the greatest potential to fall.

Are we already starting to see signs that housing prices may have risen too much? Over the last year, houses in the lowest price tier has seen accelerating price appreciation. On the other hand, high-priced houses nationally have actually declined in price over the last year.

Credit: AEI Center on Housing Markets and Finance

It is at times like this I am very happy to be living in a debt-free home in Ohio.